UK
Charles Sherwood, senior partner at Pemira, has criticised calls for disclosure of private equity pay as ‘financial voyeurism’. That makes it no less interesting to peek behind the curtains.
The left-wing press has been particularly eager to rustle the pelmet. Last week, the Guardian quoted Andrew Wileman, a business consultant, who it claimed has worked with private equity firms for 10 years. According to Wileman, there are 100 partners in European private equity who are worth 100m plus, and several who are worth 200m or more.
Will Hutton, also writing in the Guardian, quoted a study from Manchester University’s ERSC Centre for Socio-Cultural Change, which he said obtained the accounts of a fund with 8bn under management. Over five years, the 30 partners reputedly expected to make between 25m and 50m.
How accurate are these glimpses of corpulent compensation packages? Fairly accurate, according to the managing director of one private equity-focused search firm. He says a fund worth 8bn will earn a 2% management fee (160m), plus returns of 20% (1.6bn), to be divided between perhaps 30 partners and other less well remunerated staff. Each partner could easily expect to earn 45m, and perhaps more.
For associates, pay is predictably lower. Ben Aymé, a consultant at search firm Veni Group, says a typical basic pay package for a first-year associate in private equity is 65k to 90k, plus a bonus of 100%. For more senior associates this might rise to a 90k base salary, plus a 150% bonus – although Aymé cautions that every fund operates a “different pay structure”.
Another headhunter puts junior pay higher still. He says pre-MBA associates at PE funds can command a 60k to 70k base salary, plus a bonus of 100% to 200%. Post-MBA senior associates or principals are looking at a base of 80k to 100k, plus a bonus of up to 300%, plus carried interest.
It’s blatantly clear to anyone who takes the time and trouble to check, that the vast majority of private equity deals enhance the commercial capabilities of the company involved and in so doing, provide long term prospects for employment, employee income etc. If a company is inefficient at the outset, then labour cuts may be unavoidable and necessary to ensure the very survival of the company. The fact that successful private equity practitioners happen to be very well paid is irrelevant to the debate – it’s simply a glamorous issue which detracts from the true facts.
Just writing to clarify a point in the article. Partners do not recieve the 20% returns their funds make. Instead the partners earn a fraction of the 20% returns. The vast majority of the 20% returns go to the equity investors (ie pension funds, wealthy individuals etc that put up the money to start the fund in the first place).
Pay differs massively on the size of fund and the extent to which the partners spread the spoils. Look for the assets under management/professional to work out what the earning potential is.
The reality is that management fees are too high for the largest funds – when PE started, the management fee was meant to cover base salary and a sensible but not massive bonus – and carry was the hook aligning exec and client interests. Now with the larger funds, the businesses are much more profitable and partners probably make more than 1m a year before any carry – i.e. even if the fund fails, or does not invest, they are seriously well paid.
The balance of power shifting from client to PE house has enabled this – driven by strong performance over the last few years. Clients are not happy with this – but there’s little they can do. This will change if performance takes a dive – which is almost certain to happen as the cycle comes off.
The correct carry calc is a successful pe fund should make approx 2 times money back over its life (to give a 20% or so IRR), net of fees and other costs. So 8bn profit, 20% of which goes to the general partner does equal 1.6bn of carry for the investment team.
Of course, generating 8bn of profits seems unlikely and ridiculous. It’s also worth noting that many funds outside the top quartile of very larger funds – which have been consistent performers – make nowhere near as good returns. So, so say 1.5 net TMB on a fund of 500m = 250m profit, 20% of which is 50m – and such a fund may still have 20+ carry participants, so suddenly the large figures normally touted get reduced greatly.
I think the article was suggesting that PE firms take a 20% cut of profits made. They do, above a certain hurdle. Say, for instance, that a $1bn dollar fund doubles its money over its life, then it will return the original $1bn to investors – the $1bn profit will be split $800m to investors, $200m to the PE fund. Hope that clarifies the point.
The 20% is the carry. 20% of returns above hurdle, not returns of 20%
The guy at Veni does not have a clue.